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Virtual Currencies – An Enigma for Indian Authorities

In the present times, where trading and dealing in virtual currencies (“VCs”) such as Bitcoins, is surging at an extraordinary rate with astonishing highs and lows, the question of recognition and regulation of VCs under the Indian laws still looms in a cloud of confusion. After several advisories of the Reserve Bank of India (“RBI”), which has till date stood short of declaring VCs as illegal, and subsequent raids reportedly conducted by the Enforcement Directorate against operators of trading platforms of VCs in India (as already discussed in our previous updates1), the Income Tax (“IT”) department and the Securities Exchange Board of India (“SEBI”) are now considering to crack down the unregulated reign of Bitcoins. 

The IT department has recently conducted surveys across nine Bitcoin exchanges, including exchanges in Delhi, Pune, Mumbai, Hyderabad, Kochi, Gurugram, and Bengaluru, under Section 133A of the Income Tax, Act 1941, which enables the tax authorities to inter alia scrutinise and inspect the books of accounts and other documents and information for assessment purposes. The survey conducted by the authorities to undertake a preliminary assessment of inter alia the sources of funds, the identities of counter parties, bank account details and the underlying transactions dealing in trading of Bitcoins, also intend to determine any related instances of tax evasion. In the wake of these surveys and determination of almost 20 lakh entities registered on such exchanges, the IT department is reportedly intending to issue notices for tax evasion charges to approximately 4 lakh high net-worth individuals, who continue to be operational in transactions taking place in the surveyed VC exchanges.

The IT department’s move towards taxing identified investments and trading in VCs such as Bitcoins, would certainly bring new focus on the investment in VCs, which has so far remained unregulated. While, it appears that the IT department is inclined to impose capital gains tax on the sale/purchase of Bitcoins, it still leaves the issue of legality of the VCs wide open.

On the other front, SEBI is also likely to slam down the burgeoning growth of illicit investment schemes like the ‘initial coin offerings’ (“ICO”) featuring VCs like Bitcoins, which tend to entice gullible investors by its claims of high investment returns. The RBI has also, in view of the spurt in valuation and the growth of such ICOs, reiterated its concerns over the use and trading in VCs in its advisory dated December 5, 2017, and reiterated its earlier press release dated February 1, 2017, that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any VCs.

In a time when more and more investors are being attracted to invest in VCs, the momentum created by the Indian regulatory authorities, could be viewed as a caution signal for the VC investors intending to make big returns. However, the reluctance of the Government to come out with a clear policy decision on the legality of VCs and its status under Indian regulations is not only surprising but also adding to the prevailing confusion.

To put an end to this confusion, a Public Interest Litigation has been recently filed in the Supreme Court of India calling for urgent directions to either prohibit or regulate the flow of VCs and to make it accountable to the Indian exchequer. The Apex Court has issued notices to the respondent authorities, including the SEBI, Income Tax authorities, RBI and the Enforcement Directorate and is awaiting their respective responses on the issue.

Till such time the VCs remain unregulated in India, their tax treatment and implications of foreign exchange control regulations on their investment and divestment unclear, the investors are advised to exercise caution and carefully assess the risks involved in investing in VCs such as Bitcoins which could be either declared illegal or heavily regulated by the authorities in the near future.

Endnotes:

[1]“Future of Virtual Currencies in India”,    [http://www.mondaq.com/india/x/608424/fin+tech/Future+Of+Virtual+Currencies+In+India]

Legal Status of Virtual Currencies/ Cryptocurrencies in India”, [http://www.mondaq.com/india/x/583670/fin+tech/Legal+Status+Of+Virtual+CurrenciesCryptocurrencies+In+India]